Geopolitical Tensions And Rising Costs Will Undermine Semiconductor Prospects

Key Takeaways

• Geopolitical tensions, regulatory pressures, and dependence on major customers increase revenue risk and compress margins through higher compliance and operational costs.
  
• Intensifying local competition and rising investment requirements threaten future profitability, casting doubt on the sustainability of current valuation levels.
  
• Strong demand for advanced semiconductor equipment, strategic technology positioning, and resilient services underpin ASM International's multi-year revenue growth and sustained profitability.

Catalysts

Engages in the research, development, manufacture, marketing, and servicing of equipment and materials used to produce semiconductor devices in Europe, the United States, and Asia.

• Geopolitical tensions and ongoing protectionism, particularly regarding export controls between the US, China and Europe, are expected to further disrupt ASM International's access to key markets. As visibility in China remains extremely limited, a meaningful decline in orders from this region will likely lead to a gradual normalization or even contraction of revenue over the next several years, undermining top-line growth.
  
• Heightened sustainability regulations and stricter carbon emissions targets are set to increase compliance costs for high-energy manufacturing, including semiconductors. These additional operating requirements are expected to compress net margins and diminish the company's operating leverage over the long term.
  
• Over-dependence on a few major foundry and logic chip customers makes ASM International vulnerable to abrupt demand fluctuations, as evidenced by recent shifts in gate-all-around capacity investments between customers. Should multiple customers cut or delay orders simultaneously, the company may struggle to offset lost revenue and preserve earnings stability.
  
• Rising R&D and capital expenditure requirements, reflected in an 18% year-over-year increase in net R&D and forecast CapEx exceeding 200 million euros for the year, will continue to pressure free cash flow. If growth slows, reduced operating efficiency and returns on invested capital could weigh heavily on future profitability.
  
• Intensifying competition from local equipment providers in China, especially in commodity ALD and epi applications, combined with the risk of further industry consolidation and cyclical semiconductor downturns, threatens ASM International's gross margins and volume. These structural headwinds bring heightened variability to future revenue and earnings, casting serious doubt on the sustainability of current valuation multiples.

ASM International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on ASM International compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming ASM International's revenue will grow by 6.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 15.4% today to 22.8% in 3 years time.
• The bearish analysts expect earnings to reach €868.9 million (and earnings per share of €21.48) by about July 2028, up from €483.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 31.3x on those 2028 earnings, down from 45.6x today. This future PE is lower than the current PE for the GB Semiconductor industry at 51.0x.
• Analysts expect the number of shares outstanding to decline by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.01%, as per the Simply Wall St company report.

ASM International Future Earnings Per Share Growth

Risks

• Sustained and robust demand for advanced logic and foundry equipment driven by the transition to gate-all-around technology at 2-nanometer and 1.4-nanometer nodes, with customers reporting stronger initial demand at these nodes than previous generations, is likely to fuel revenue growth over multiple years.
  
• Increasing complexity in semiconductor manufacturing, particularly a double-digit rise in the number of Atomic Layer Deposition (ALD) layers per node transition, reinforces ASM's strong technology positioning and supports both market share and pricing power, potentially boosting margins and earnings.
  
• Ongoing and large-scale investments by leading customers in capacity expansion for advanced nodes, along with strong AI-related demand, suggest continued multi-year topline revenue growth well above short-term fluctuations.
  
• Expansion and resilience in spares and services-growing at a compound annual rate of nearly 20% over five years-provide a stable, recurring revenue stream that is likely to enhance net income and provide downside protection even if new equipment sales are volatile.
  
• Operational improvements, cost controls, and successful product mix management have resulted in gross margins that remain at the upper end of the company's target range above 50%, which, when combined with disciplined R&D and SG&A spending, are likely to support sustained profitability and strong earnings per share.

Valuation

• The assumed bearish price target for ASM International is €449.33, which represents two standard deviations below the consensus price target of €609.85. This valuation is based on what can be assumed as the expectations of ASM International's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €760.0, and the most bearish reporting a price target of just €445.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €3.8 billion, earnings will come to €868.9 million, and it would be trading on a PE ratio of 31.3x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of €450.9, the bearish analyst price target of €449.33 is 0.4% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.